Ensco’s Recent Contracts, Acquisition, and Outlook

Ensco operates through three segments: Floaters, Jackups, and Other. The company owns and operates an offshore drilling rig fleet of 68 rigs, including 30 located in the Middle East, Africa, and the Asia Pacific, which comprise 4 rigs under construction; 21 situated in North and South America, including Brazil; and 17 located in Europe and the Mediterranean. It also offers management services on rigs owned by third-parties. The company serves government-owned and independent oil and gas companies. Ensco plc was founded in 1975 and is headquartered in London, the United Kingdom.

Recent Events

Ensco announced on July 11th that it has been awarded three drillship contracts offshore West Africa, representing an aggregate three years of contracted term and more than six additional years of options.

As a result of these new contracts, contract drilling expense for second quarter 2017 is expected to be approximately $282 million after adjusting for a $10 million settlement of a previously disclosed legal contingency, slightly higher than the prior guidance of $270 million to $280 million, or $292 million on an unadjusted basis. Anticipated capital expenditures are now expected to total approximately $350 million for the nine month period from second quarter 2017 through fourth quarter 2017. This capital expenditure estimate includes approximately $240 million for new rig construction, inclusive of approximately $29 million of capitalized interest, and approximately $110 million for rig enhancements and minor upgrades and improvements.

At the end of May, Ensco and Atwood Oceanics, Inc. (NYSE: ATW) jointly announced that they have entered into a definitive merger agreement under which Ensco will acquire Atwood in an all-stock transaction.

Under the terms of the merger agreement, Atwood shareholders will receive 1.60 shares of Ensco for each share of Atwood common stock for a total value of $10.72 per Atwood share based on Ensco’s closing share price of $6.70 on 26 May 2017. This represents a premium of approximately 33% to Atwood’s closing price on the same date. Upon close of the transaction, Ensco and Atwood shareholders will own approximately 69% and 31%, respectively, of the outstanding shares of Ensco plc. There are no financing conditions for this transaction.

Ensco expects to realize annual pre-tax expense synergies of approximately $65 million for full year 2019 and beyond. The combination is expected to be accretive on a discounted cash flow basis.

First Quarter Results

The company reported a loss of $0.09 per share for first quarter 2017 compared to earnings per share of $0.74 a year ago. Results from discontinued operations were zero cents per share in both first quarter 2017 and first quarter 2016.

Revenues were $471 million in first quarter 2017 compared to $814 million a year ago, primarily due to a decline in reported utilization to 58% from 65% in first quarter 2016 as well as previously announced sales of rigs that operated a year ago. The average day rate for the fleet declined to $156,000 in first quarter 2017 from $208,000 in first quarter 2016.

Contract drilling expense declined to $278 million in first quarter 2017 from $364 million a year ago as lower personnel expense and other activity-based costs due to fewer rig operating days more than offset rig reactivation and contract preparation costs.

Depreciation expense declined to $109 million from $113 million a year ago due to the extension of useful lives for certain contracted assets. General and administrative expense increased to $26 million in first quarter 2017 from $23 million a year ago due to higher accrued performance-based compensation, partially offset by lower personnel costs from organizational restructuring and other expense management actions.

Interest expense in first quarter 2017 was $59 million, net of $17 million of interest that was capitalized, compared to interest expense of $65 million in first quarter 2016, net of $12 million of interest that was capitalized. As noted above, first quarter 2017 other expense included a $6 million loss to complete a previously announced exchange offer for $650 million aggregate principal amount of senior notes.

The company will hold its second quarter 2017 earnings conference call at 10:00 a.m. CDT (11:00 a.m. EDT and 4:00 p.m. London) on Thursday, July 27, 2017. The earnings release will be issued before the New York Stock Exchange opens that morning.

Stock Influences and Risk Factors

The development and exploitation of alternative fuels;

Disruption to exploration and development activities due to hurricanes and other severe weather conditions and the risk thereof;

Improvement or stability in oil prices could improve the company’s performance;

The worldwide military or political environment, including uncertainty or instability resulting from an escalation or additional outbreak of armed hostilities or other crises in oil or natural gas producing areas of the Middle East or geographic areas in which we operate, or acts of terrorism.

Stock Performance

ESV shares closed on July 12, 2017 at $4.92, off 3.53% on traded volume of 20.9 million shares. The current RSI(14) is 35.29. At $4.92 ESV shares are trading below their 50-day and 200-day moving averages at $6.33 and $8.58 respectively.

Summary

Ensco is a profitable company trading below its 50 day and 200 day moving averages. More than one source list the company’s book value over $27.00 per share, as well as a cash position over $6.50 per share. These metrics indicate that Ensco (ESV) could be trading in value territory.

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